Galston's post is worth reading in full, so I will not try to summarize, except for one very interesting data point: that almost 45% of its revenue comes from Seller Services, compared to ~25% just two years ago.

This means that the growth of the marketplace is going to be more dependent on the number of sellers, than the transaction volume. At first look, this does not look too intelligent: the latter number will certainly grow faster. However, as we see marketplaces maturing, this is the way that the leader/incumbent can take aggressive pricing moves to keep competitors away. This is observable in Etsy's commissions moving from 5+% to 3.5%. If you are an emerging Etsy competitor, there's not enough margin for you to grow fast.

Ultimately, this can lead to marketplace deflation, a la CraigsList, which came and killed many fledgling classifieds sites with its massive traffic and free offering. I am curious to see if we start seeing this type of defensive behavior from the modern marketplace champions, such as, Uber and Airbnb.

March 16, 2015

Tech startup valuations are exploding around the world. As a result, we are seeing higher expectations from entrepreneurs here in Turkey and CEE rising, as well, with higher "asks" in seed and Series A rounds than ever before. We find ourselves passing on opportunities we find interesting for valuation reasons, which is quite new for us.

This is not so much of a problem for seed rounds. There are investors, mostly angels, who can live with more modest returns than a VC, so these startups do get to find funding and go to market. However, I think it's a dangerous game to play in Series A, even if you are able to secure funding at lofty valuation.

Let's start with the reminder that, by our count, there have been only 7 Turkish internet startups that have reached the $100m valuation mark, and it took some of them more than a decade to get there. You can do the math with the super high discount rate you should apply to a Series A stage venture, to come up with the range at which we would consider as Series A round.

How you value a Series A round is usually not based on financial metrics, but is an exercise around how much capital the company needs to get to its next set of major milestones, how big the founder team is, and what level of dilution is appropriate to make sure the team stays motivated. As a result, almost all Series A rounds already overvalue a company, with the hope that rapid growth in a large market will allow the company to fill beneath this high valuation in time for Series B.

What happens when this is not accomplished is the prospect of a down round. Talking with founders, I find that most underestimate the difficulty of down rounds, which rarely happen, and when they do, are usually damaging to so many aspects of a company, that very few companies go on to become successful.

If you are a tech founder, please keep in mind that an overprices Series A round can create an existential risk for your startup.

December 11, 2014

The only reason I did not have eight champions league matches to choose from on my TV is that someone's spreadsheet suggested that it was more profitable to remove my alternatives to try to coerce me into watching the single game that was sold to the Turkish CL rights holder. Well, it didn't work.

This reminds me of the diamond trade, where supply is artificially manipulated to manage pricing levels. Ultimately, the laws of nature are on the diamond industry's side: there will be less diamonds in the future. But in digital media, where the marginal cost of increased consumption is almost nil, the attempts at feigning scarcity will lose in the long term.

I came across a blog post today by Connor Murphy on the different approaches to fundraising for your startup. It made me think of the vast amount of resources for tech entrepreneurs today, compared to 1999, when I started my startup journey. I sometimes wonder whether the naivete, that was a result of how clueless I was about what it would be like to start a tech business, was a factor in my decision.

In any case, if you are a rookie tech founder, there's a ton of intelligence, advice and anecdotes available for you out there. One of the better resources is YCombinator's Sam Altman's class at Stanford titled "How to Start a Startup". He tapes his class sessions and posts them on Youtube. I would highly recommend investing a few days in digesting his content.

April 29, 2014

This is the age of TechCrunch and Business Insider. Numbers with a lot of zeroes are sexy, so tech startups are sexy. Again. The last link is not to be taken as a suggestion that I think there is a bubble. I don't think there is. Not like in 1999. Topic for another post.

But, the high valuations and the amplification of tech media is whetting the appetites of entrepreneurs in our region, causing eventual disappointment on both sides of the table.

Our region has historically had difficulty creating large technology companies. I am excluding Turkcell, etc., as I view them more as regulated utilities. Turkey has not produced a single global technology success story, yet. I think that is an anomaly and it will change, but so far, it's the reality. The largest tech exit in Turkey was GittiGidiyor, at $220m. We now have a handful of tech companies valued over $100m, and some of those will get to large exits at some point.

Entrepreneurs should understand that this is the framework we have to work within.

Now, combine this fact with the expectation you'll see at every early-stage tech investor: at least a 10-20X return on her investment, if all goes well. They expect this because their portfolio will need these 10-20Xs to deliver the promised returns to their investors. That's how the math works. Without these homeruns, the portfolio will deliver mediocre returns, at best.

This is the math you, the entrepreneur, should have in mind in your dialog with any investor in our geography. Until we see $billion exits, we'll assume your company will be exit at much lower valuations, setting the stage for more modest valuations, compared to silicon valley stories you read about.

April 04, 2014

When we set out to raise our early stage VC fund focused on Turkey and CEE in 2012, one decision we had to make was on fund size. At that point, we decided that it would have to be a $100+ fund. I want to share our thinking behind this.

There is already quite a bit of talk around Series B difficulties. Mattermark's Danielle Morrill has looked at the numbers, and Redpoint's Tom Tunguz and Atlas's Fred Destin have chimed in with their well thought-out pieces. We agree that the hurdle for Series B rounds is quite high for startups, as this is when companies start selling numbers and performance, rather than visions and dreams.

Please note, that the conversation so far is centered on developed markets, with many VC firms, mostly well-capitalized, evaluating the Series B opportunities. Now, superimpose this situation on the market that our new Turkey and CEE fund is covering. You'll see the same difficulties facing Series B seeking startups, compounded with the fact that the small number VC firms covering the region are mostly small, or not committed to investment shere.

Therefore, we decided that we'd have to have deep enough pockets to be able to underwrite the fundraising needs of our portfolio companies and see them through maturity. Of course, this assumes that they are performing - we would not put good money after bad money, but we feel comfortable that our successful portfolio companies will not be at the mercy of the funding climate or the appetite of potential investors.

This is reflected in the case of Metrekare.com. Even though we invested at quite an early stage, the Metrekare.com team feels comfortable that they will have access to funding, as long as the company is progressing in the right direction.

January 21, 2014

This is a guest blog by my partner Roland Manger. It was originally published on the Earlybird blog.

VC firms aren´t really interesting, the companies they invest in are. That´s why only few people noticed how profoundly Earlybird has changed. When you looked at the partner profiles on our website five years ago, you saw a bunch of Germans with a heavy Germanic focus. Yes, we helped our companies to grow and expand globally, and yes, we listed them on international stock exchanges or helped them be acquired by large US and even Asian corporates. But in most cases, this was based on German, Austrian or Swiss teams only and we felt very comfortable with that.

I must say I am very happy that we left our comfort zone and started to look at the VC opportunity in Europe in a different way.

For a number of reasons that many smart people have reported about, Berlin has become a uniquely attractive place for some of the most brilliant founders from all over Europe, sometimes even beyond to conceive great new products and build globally active companies around them. So rather than remaining a German VC supporting German companies, Earlybird became a Berlin based VC with an international team (check out the website now) working with exceptional founders from all over Europe.

Taking a different look at our world also made us realize that just East of Berlin, in CEE and Turkey, we could find a new world of smart and ambitious entrepreneurs that was largely untapped by the established VC community. A lot of preconceived notions still dominate the views even of European VCs about the opportunity in Turkey and the European East, much like the ones that US VCs had and often still have about Western Europe.

But if you aren´t a chauvinist, you have to admit that entrepreneurial talent is distributed evenly around the world. As VCs we are looking for the most exceptional of entrepreneurs regardless of where we are active, those that defy conventional wisdom and are used to dealing with difficult challenges independently of the predominant cultural bias of their home country. In most of the places we looked at, technology education traded at a premium, so the best and brightest were and still are seeking engineering degrees at home and abroad. Examining the cross-section of both really got us excited. We found ways to meet tech entrepreneurs (most of them in the making) from Turkey, the Balkans and North Eastern Europe, looked at now over 1300 investment opportunities and felt reassured by what we saw.

With the new Earlybird Digital East Fund, we are putting money where our mouth is. Three partners joined me in this quest: Cem Sertoglu and Evren Ucok have been both the most prolific and successful early tech investors in Turkey. Dan Lupu has covered large parts of CEE for Intel Capital. Several large international institutional investors and a number of successful entrepreneurs and family investors from all over the world share our view and have committed capital to the fund. Now is the time to prove them and us right.

I think the money slides are 19 and 20. We see so many startups comparing themselves to companies with very different economics underlying their businesses. And, much capital gets wasted, chasing someone else's growth curve that is just not attainable for their business model.

The LTV/CAC analysis needs to be a top-down one, and one that gets iterated as a company moves down its own growth curve. Any hasty conclusion is usually a costly one.